German stocks outperform Spain after downgrade

MADRID (MarketWatch) -- European stocks finished a quiet Monday with a minor advance, as German stocks outperformed their Continental rivals in the first reaction to a downgrade of Spain by Fitch Ratings.

The Stoxx Europe 600 (SXXP) finished the day with a rise of 0.3% to 244.79, led by automobile makers and technology-sector firms. Shares of Mercedes-Benz maker Daimler AG (DAI) rose 1.5% and shares of business software giant SAP
SAP, +0.72%
(SAP) rose 1.7%, as the German DAX finished with a rise of 0.3% to 5,964.33.

The weaker euro that has resulted from the debt burdens of Southern Europe has helped the competitiveness of German exporters. European stocks also got a lift from comments from Federal Reserve Bank of Chicago President Charles Evans, who said Monday that Europe's debt woes could prompt the U.S. central bank to delay raising interest rates, though he played down the impact of the crisis so far. See full story.

Greece's ASE Composite (1802216) also closed lower, down 1.2% to 1,550.78. French stocks were also weaker with the CAC-40 (PX1) down 0.2% to 3,507.56.

France's budget minister, Francois Baroin, reportedly told French television station Canal Plus on Sunday that keeping the country's own AAA credit rating "is an objective that is a stretch." He said that to keep the rating, the country has to carry out planned cuts in spending and cut its deficit.

Volume was thin on Monday, with U.S. and U.K. financial markets both closed for a holiday. U.S. stocks closed weaker on Friday, weighed down by the Fitch news, even though that move had been expected for some time, given that Standard & Poor's had already downgraded Spain.

That news kept worries over European debt fresh in Wall Street's mind on Friday, with the Dow Jones Industrial Average closing down 1.2%. It was off nearly 8% from where it stood at the end of April, marking the worst monthly drop since February 2009. See Market Snapshot

European markets weren't as rattled by the Fitch news.

"The market has reacted relatively calmly to the downgrade of the sovereign rating of Spain by Fitch, from AAA to AA+ on Friday evening. Moody's still has a AAA for Spain while S&P has a AA," said Dominique Barbet, senior economist with BNP Paribas, in a note to investors on Monday.

He said the move itself wasn't completely surprising, though the timing was, coming on the heels of a serious fiscal consolidation plan by the government.

"We reckon the main issue with the Spanish economy is not the government's policy, nor the public debt, but the high level of private debt," said Barbet. "This is also a threat for some parts of the financial industry, which is going through turbulences at the moment and has started a much needed consolidation. This adds to the rationale for the ECB to keep on buying public debt on the market."

All of Spain's most heavily weighted stocks were weaker on Monday, led by Banco Santander (SAN)
STD, -0.96%
down 0.9%, and BBVA (BBVA)
BBVA, +1.43%
down 1.2%.

Sacyr-Vallehermoso (SYV) was among the few gainers in Spain, up 7% after the Spanish builder said it's in talks to refinance debt of its Vallehermoso Division Promocion SAU unit. Sacyr said it has reached agreement with lenders on the main parts of the plan, but hasn't yet come to a final agreement.

Economic data in Europe showed economic sentiment that had been steadily improving from the lows of 2009 took a dip backward in May as stresses over debt burdens complicated the outlook for euro-area growth. Consumer confidence was particularly bad in southern Europe. See Europe economic sentiment dips

On Monday, the U.S. dollar edged higher against the euro and yen, after ending May trading in North America with its biggest rise since October 2008. Read the MarketWatch currency report.

In an interview with Le Monde on Monday, European Central Bank President Jean-Claude Trichet on Monday denied that an Anglo-Saxon conspiracy was to blame for the rapidly falling euro.

"The issue is that of financial stability within the euro area on account of bad fiscal policy in certain countries, in particular Greece," he said. "It is imperative that this be corrected." See Trichet denies Anglo-Saxon attack

Shares of BP
BP, +1.02%
(BP)(BPE5) skidded 7.6% in Frankfurt trading. The company is now facing a never-attempted measure to control the Gulf of Mexico oil spill, after its "top kill" effort -- stemming the oil by pumping heavy drilling liquids into the well -- didn't work.

Irish bookie Paddy Power is offering 6-to-4 odds that BP Chief Executive Officer Tony Hayward will be the first to lose his job due to the Gulf of Mexico oil spill. See Market Pulse

While London markets are closed, over the weekend, Chief Treasury Secretary David Laws resigned over revelations about his parliamentary expenses. Laws, a Liberal Democrat, had been charged with finding cuts to public spending to tackle Britain's fiscal deficit.

There was some speculation the news might unsettle U.K. stocks when they return on Tuesday, as his successor, fellow Liberal Democrat Danny Alexander, is a virtual unknown with little financial experience, according to U.K. newspapers.

Jonathan Coughtrey, analyst with Action Economics, said he didn't expect much market reaction as it wasn't due to internal pressures within the coalition. "The risk would be if it looked like the coalition was starting to crumble. There could be some risk stemming from the fact that the new Treasury Secretary is now being accused of having avoided paying some of his taxes," he said in an e-mail.

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